3 November 1999 External T.I. 9912855 - DEDUCTIBILITY OF REGISTRATION COSTS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Costs of Registration under Environmental Management System (EMS). Whether these are a deductible business expense.

Position:

They would be deductible on the basis that they would appear to meet the "purpose" test of 18(1)(a). However, if the outlay is material and can reasonably be considered to provide benefits for the taxpayer in future years, the amount should be amortized over such years on a reasonable basis. What is material is a question of fact and judgement.

Reasons:

EMS registration is provided to businesses that are ISO certified or will obtain such certification. Document 7-970205 dated May 8, 1997 states that ISO registration costs are deductible in the year incurred under subsection 9(1).

Comments contained in IT's-417R2 and 487.

Mr. Roy John
Canadian General Standards Board
Quality Systems Division
Ottawa, Ontario
K1A 1G6								F.B. Fontaine
									991285
November 3, 1999

Dear Sir:

Re: Environmental Management Systems (EMS)

This is in reply to your facsimile transmission of March 10, 1999 concerning the above captioned subject in respect of which you provided additional information during our recent telephone conversation (Fontaine/John).

The Canadian General Standards Board (SGSB) provides an EMS registration program to business organizations that have obtained or will obtain the ISO 14001 standard. The program is to distinguish that these organizations conform to such ISO standard by complying with (a) environmental legislation and other requirements, (b) the prevention of pollution and (c) the commitment to continual improvement in that regard. Organizations that are registered report that the discipline of adhering to the EMS standard has resulted in cost savings while in certain cases suppliers are being urged by their customers to obtain the EMS registration.

For the purpose of registration, SGSB will, through an on-site audit, review an organization's EMS documentation, assess the level of commitment to improved EMS performance and the implementation of its EMS procedures. The cost of registration is between $15,000 to $20,000. Following registration, the organization will also be subject to an annual audit at an additional cost.

It is your view that the particular costs of registration are a legitimate business expense. You ask us to comment on the deductibility of such costs, including the particular provisions of the Income Tax Act (the "Act") that would apply in the circumstances.

Whether or not the situation you described is a completed or proposed transaction, paragraph 22 of Information Circular 70-6R3 (the "Circular") outlines the procedure to be followed in respect of such transaction. Accordingly, while we are unable to provide confirmation of the income tax effects of the particular situation, we are prepared to offer the following general comments which represent an expression of opinion. As indicated in paragraph 22 of the Circular, such an opinion is not an advance income tax ruling and, therefore, is not binding on the Canada Customs and Revenue Agency.

1. An amount that is a business expense of a taxpayer would normally be deductible in computing the taxpayer's income under subsection 9(1) of the Act except, as provided under paragraph 18(1)(a) and section 67 of the Act, to the extent that the amount was incurred by the taxpayer for the purpose of gaining or producing income from the business, and that the amount is reasonable, respectively.

2. IT-487 provides some comments with regard to the general limitation on deduction of outlays or expenses as required by paragraph 18(1)(a) of the Act. Subparagraphs 2(b) and (c) of IT-487, respectively, provide that (i) an outlay or expense will meet "the purpose" test in paragraph 18(1)(a) if the outlay or expense was a part of the income-earning process and (ii) outlays or expenses made or incurred to maintain income or to reduce other expenses are also deductible as their purpose would be to increase income, whether or not such an increase resulted. An outlay or expense that was incurred by a taxpayer to maintain customers' satisfaction and the ability to compete would, in our view, satisfy the requirement in (i) while the last sentence in the second paragraph above would appear to satisfy the comment in (ii).

3. Paragraph 4 of IT-417R2 provides that as a general rule, taxpayers should use the accrual basis in computing their incomes under section 9 of the Act, except that "running expenses", as described in the IT and subject to subsection 18(9) of the Act, would normally be deductible in the year incurred. However, in accordance with paragraphs 4 and 5 of IT-417R2, where a material expense made or incurred in a year may reasonably be viewed as providing definite benefits in subsequent years, a part or all of the expense would be required to be deferred to future years and amortized on a reasonable and systematic basis. The determination of whether an amount is material is a question of fact and judgement.

We hope that these comments will be of assistance.

Yours truly,

Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

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